Question

a. Explain in writing and with a graph how markets where production generates pollution will fail...

a. Explain in writing and with a graph how markets where production generates pollution will fail to produce the efficient amount of the good that causes pollution.

b. How might government intervene to improve on this outcome? Explain.

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Answer #1

Ans) Negative externality is when the bystander bears the cost of any activity. Here, social cost is more than the private cost. The difference between social cost and private cost is known as external cost. When this external cost is ignored, goods are overproduced in the market. This causes market failure. That is, free market fails to achieve socially optimal outcome. Eg÷ pollution.

To internalise this externality, government imposes tax equal to external cost. This reduces the supply and brings market quantity equal to socially optimal quantity.

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